Archer Daniels Midland and the Friendly Competitors

By 1995, Archer Daniels Midland Company (ADM) had become one of the world'slargest agricultural companies. ADM processes corn, wheat, soybeans, peanuts, and otheroilseeds to make products used by the food, beverage, and chemical industries. its global salesin 1994 were about $13 billion. Since 1966, the company had been headed by DwayneAndreas, a hard-driving executive who pushed the company toward greater productivity andrapid expansion. Dwayne brought in his son, Michael D. Andreas, who became the company'sexecutive vice president of sales and marketing.

In early 1989, Dwayne and Michael Andreas decided that ADM should enter the lysinebusiness. Lysine is an amino acid derived from corn that is used as an additive in animal feedbecause it promotes the growth of lean muscle. Because lysine is an undifferentiatedcommodity buyers are price-sensitive, a characteristic that is normally indicative of a highlycompetitive market. But Dwayne and his son had noticed that the world market in lysine wasdominated by only three companies: Ajinomoto (a Japanese company), Kyowa (also Japanese),and Miwon (a Korean Company). Cheil, a Korean company, had plans to enter the market by1991. The fact that there were only a handful of players supplying the market attracted the twoAndreas: the market looked more like a staid gentlemens club than an aggressive rivalry.

To manage ADMs entry into the lysine business, Dwayne Andreas and his son, Michael,hired an extremely bright and energetic young man named Mark Whitacre. Whitacre would runADMs lysine business and would report to Michael Andreas. Only 32 years old, Whitacre had aB.S. and an M.S. in animal science from Ohio State University, had earned a Ph.D. in nutritionalbiochemistry at Cornell University, and had worked 5 years for Degussa, a German chemicalcompany. Married to Ginger Gilbert, his girlfriend at the high school where he had been seniorclass president, Whitacre now became president of ADMs new lysine division. He thrived atADM, where he enjoyed the absence if bureaucracy and the dynamic and quick moving can-do company culture.

For the first few years I loved working at the company. I was very proud of ADM and how it operated. I was very enthusiastic about my work, very excited. (Statement of Mark Whitacre). ADM started building its new $100 million lysine production plant in September, 1989and finished in February, 1991, a surprisingly short period of 17 months. Capable of producing250 million tons of lysine a year-enough to supply half of the annual worldwide demand-the newplant was the largest in the world. With the resources of ADM behind him, Whitacre could hirethe best people from around the world to work for him in ADMs new lysine business.

When Whitacre began selling lysine, it was selling for $1.30 a pound. ADMs large newplant, however, brought a huge volume of new product into the market, and prices quickly beganto fall. (See the figure Timeline of Meetings and Prices in Lysine Price-Fixing Case.) Whitacrefelt that in order to get customers to buy from a new comer, he had to price his product belowestablished competitors. But his tactic led to a disastrous and costly price war among the fivecompanies in the industry.

When we started selling, prices started falling, and there was a tremendous price war. Lysine went from about $1.30 a pound we were losing money, a few million dollars a month. (Statement of Mark Whitacre)

ADM was in fact losing about $7 million a month. Managers at all five lysine-producingcompaniesall of whom were also losing moneyfelt the devastating situation could notcontinue. Whitacre knew something had to change or his new career would be over just as itwas starting. Then, he learned that ADM had a method of dealing with such situations. TerryWilson, president of ADMs Corn Processing Division, had developed the method and thenintroduced it to the managers at other divisions of ADM. Michael Andreas talked with Whitacreand asked him to go and learn from Terry Wilson how ADM does business.

It was during my first year or so at the company that I started hearing about price fixing at ADMin four or five other divisions. People said it was fairly common. I didnt see it, but I heard about it from people who were involved with it either directly or indirectly ... Around February 1992 they told me that they wanted me to work closer with Terry Wilson I should look to Terry as a mentor, someone to teach me some things about how ADM does business When they told me that, I had a strong feeling about what they were getting at, about what was coming next. (Statement of Mark Whitacre) Whitacre began discussing his problems with Terry Wilson and learned that the companyhad often had to deal with tight markets. Wilson proposed that he and Whitacre meet with topmanagers of the other four companies producing lysine. He would show Whitacre what to do. Ameeting was arranged, and on June 1992, Wilson and Whitacre met in a Mexico City hotel withthe managers of Ajinomoto and Kyowa, the two Japanese producers of lysine. Absent from themeeting were managers from the two Korean companies, Miwon and Cheil. Among them,however, ADM, Ajinomoto, and Kyowa controlled most of the worlds lysine market.

During the June, 1992 Mexico City meeting, Terry Wilson stood in front of a flip chart andasked the representatives of the companies how many million pounds of lysine each of themproduced in a year in their plants. He wrote the quantities on the flip chart and added themtogether, including estimates for the two absent Korean companies. Wilson then turned thepage over. He now asked the group for their estimates of how many million pounds of lysinewere actually purchased each year in Europe, Latin America, Asia, and the United States. Hewrote down these quantities and added them together on a second page. Finally, he comparedthe amounts on the two pages and pointed to our problem: The total amount they wereproducing was 25 percent more than the total amount of worldwide demand. Wilson nextmultiplied their estimate of worldwide demand by 60 cents, the current price of a pound oflysine. He also multiplied their estimate of worldwide demand by $1.30, the price the Japanesecompanies were maintaining before ADM had entered the market. The difference was $200million. Wilson declared that $200 million was the amount that the five companies were givingaway to their customers. This meant, he continued, that the benefits were going to theircustomers, not to the five competing companies who had each spent hundreds of million ofdollars building their plants. At ADM, Wilson said, We believe the competitor is our friend andthe customer is our enemy. Whitacre was listening. We should be trusting,Wilson added,andhavecompetitive friendliness among the companies.

Whitacre joined the conversation when Wilson and the representatives of the twoJapanese companies turned to discussing a target price at which the companies could agreeto sell lysine if we stop the competition. The purpose of their meeting, it was noted, was to endthe price war among them that had driven prices downward. Their aim could be achieved,however, only if all five companies agreed to sell lysine at the same price, without undercuttingeach other. The managers of the two Japanese companies volunteered to contact the twoabsent Korean companies and talk them into coming on board and joining their agreement.Toward the end of the meeting, the representative of Ajinomoto summed up the agreement: ifthe discussion [with the Korean companies] go smoothly, we will aim for prices at the level of$1.05/lb for North America and Europe by October, and $1.20/lb in December. Terry Wilsonsuggested that to hide the real purpose of any future meetings, they should form a tradeassociation that would meet periodically with a fake public agenda. This, he said, was howADM had arranged secret price-fixing meetings for other commodities the company produced.

After the meetings, Whitacre and Wilson flew home. Over the next few days, Markgradually raised his prices as they had agreed. So did the other four companies, including theKoreans, who had evidently been talked into joining the agreement. In the United States, theprice of lysine rose to $1.05/lb by the end of the summer of 1992 (see Figure). For a while,Whitacre felt that the price wars had ended.

When Whitacre was contacted by managers of the four other lysine companies, heagreed they should all meet in Paris in October, 1992 to launch the newly formed InternationalAmino Acid Producers Association. They published a fake agenda that they would discussanimal rights and other environmental concerns. But they never discussed those topics. Instead,Whitacre and the other managers spent their meeting time congratulating themselves on thesuccess of their earlier agreement and working to reach a new agreement on future prices foreach region of the world where they sold lysine.

After the Paris meeting, however, Whitacre realized they still had a problem. Instead ofrising, the price of lysine stayed at $1.05 through the end of 1992, and then began to graduallydecline. The price fell through January, February, and March of 1993, and reached 70 cents byApril (see Figure). In April, Whitacre met with Michael Andreas and Terry Wilson, and discussedscheduling an urgent meeting with the representatives of the other companies to talk about thedeteriorating situation. Since Ajinomoto was the largest lycine producer, they decided to beganby meeting with officials of Ajinomoto. The meeting took place in Decatur and continued inChicago. At the meeting, Andreas and Wilson explained to the Ajinomoto managers that themajor problem with their price-fixing agreement was that the five companies had not agreed tolimit their production quantity. In the absence of any quantity agreement from the supply side,each of the companies had tried to produce and sell as much lysine as it could. Together, theyhad flooded the market with more product than was being demanded, and so could not hold totheir price agreements. The only way to bring stability to the market was by controlling volumeon the supply side. Unless volume is controlled, Wilson noted, prices go down. The Ajinomotorepresentatives said they would think about it. With prices still falling, Whitacre, Wilson, and the Ajinomoto officials again met-this timein Tokyo-on May 14,1993 and they again discussed limiting the quantity they were producing inorder to improve prices. At the meeting, Wilson explained that in other markets ADM had metwith competitors and each competitor had agreed to sell only a specific quantity of the productto ensure that their cumulative supply did not outstrip demand. Once specific volumes areallocated to each company, he pointed out, there is no need to even monitor prices because aslong as the volume [of each company] turns out okay, if they want to sell [their assigned volume]for less money, thats their business. The Ajinomoto people were still hesitant.

Whitacre realized, moreover, that an agreement to limit the volume of lysine eachcompany could sell would require an agreement with all four companies, not just Ajinomoto. Hewas feeling increasingly stressed because by now the price of lysine had dropped to 60 cents apound, so that ADM as well as the other companies and they agreed to meet on June 24, 1993in Vancouver, Canada. But the meeting only frustrated Whitacre. Although they again reachedan agreement on prices, the managers quarreled over accepting restrictions on the amounteach could sell because everybody wanted a bigger share. Ajinomoto, especially, was still notwilling to limit how much it could sell. They all agreed, however, to at least hold to their currentlevels of production and to raise their prices together to the newly agreed levels.

After the Vancouver meeting, Whitacre breathed a sigh of relief as he watched pricesgradually move upward in tune with their agreement. The experience of the past severalmonths, however, had convinced him that the companies would have to agree on a volumeallocation if they were to hold the line on prices. On October 25, 1993, Andreas, Wilson, andWhitacre set up another meeting with officials of Ajinomoto in Irvine, California so they couldagain try to hammer out a volume agreement. The representatives of the two companies finallyagreed that in 1994 each company would limit itself to selling the same quantity it had sold in1993, plus a certain amount of the quantity by which they estimated the industry would grow in1994. If they did not stick to this agreement to limit their volumes, Michael Andreas warned, thenADM would use its huge lysine capacity to again flood the market and drive down prices foreveryone and there becomes a free-for-all. The next step was to bring the other companiesinto their volume agreement.

On December 8, 1993, representatives of ADM, Ajinomoto, Kyowa, and Miwon met in

Tokyo; Cheil was not represented at the meeting. In Tokyo, the companies agreed on prices forthe coming quarter. More importantly, they finally also agreed to a schedule indicating theamount of lysine (in tons) that each could sell in each region of the world. They also agreed on amethod of ensuring that none of them would be tempted to sell more that they were allowed tosell: if a company sold more than its allocated share, then at the end of the year, it would haveto make amends by buying that amount of lysine from another company that had sol less thanits allocated share. Moreover, every month each company would send a report to an official atAjinomoto indicating the amount of lysine it had sold the previous month. These reports wouldbe audited and Ajinomoto would distribute the reports to the other companies.

A few months later, on March 10, 1994, the companies met in Hawaii where Cheil joinedthe group and also agreed to limit its sales volume to a specified amount. Now, at last all fivecompanies had succeeded in reaching an agreement to set both their prices and theirproduction volumes.

Whitacre and, sometimes, Wilson and Andreas, continued to meet once a quarter withtop managers of Ajinomoto, Kyowa, Miwon, and Cheil for the rest of 1994 and through the firsthalf on 1995. Lysine prices from December 1993 until April 1995 remained at about $1.20 perpound in accordance with the agreements the companies had hammered out (see Figure).

The agreement ended abruptly on June 27, 1995 when FBI officials raided the offices ofADM and questioned Michael Andreas at his home about price-fixing in the lysine market.Andreas said that it was impossible to fix prices in the lysine industry and denied that ADM hadever exchanged price or production information with competitors. A few days later, however, theFBI revealed that in November, 1992, they had convinced Mark Whitacre to become an FBIinformer. Subsequently, when Whitacre attended price-fixing meetings, he had carried hiddenaudio or video recorders that had recorded the discussions among the companies. All theconversations among Andreas, Wilson, Whitacre, and the managers of Ajinomoto, Kyowa,Miwon, and Cheil had been recorded on audio tapes, and some had even been videotaped.

A month later came another surprise. It was revealed that while Whitacre was recordingthe price-fixing discussions between ADM and the competitors, he had secretly been takingmoney from ADM. Altogether he had taken $2.5 million from the company, Whitacre claimedthat this was a bonus and that the company often let its executives pay themselves suchbonuses under the table to avoid taxes.

Based on the tapes that Whitacre turned over to the FBI, ADM was indicted as acompany for price-fixing and fined $100 million. On July 9, 1999, Andreas and Wilson were eachfined $350,000 and given 20-month prison sentences for price-fixing, a sentence the courtreaffirmed on June 26, 2000. Whitacre, whose theft of money from ADM nullified the immunityagreement he had worked out with the FBI, was sentenced to 9 years in prison forembezzlement, plus 20 months for price-fixing and forced to return the money he took. Themanagers of the Korean and Japanese companies that participated in the price-fixing meetingswere fined $75,000 each, but were granted immunity from serving time in prison in exchange foragreeing to testify against ADM and its executives. On July, 6, 2000, the European Union finedADM an additional $46 million for fixing lysine prices in Europe.

Mark Whitacre spent eight and a half years in federal prison and was released onDecember 2006. He was given what he calls a second chance when Cypress Systems, Inc., aCalifornia biotechnology company, agreed to hire him. He is now chief operating officer for thecompany. And he greatly regrets what he did. In a 2009 interview, Whitacre said :

I made some horrific decisions and broke some serious federal laws. In fact, ego and greedwere behind many of these poorly made decisions. Others have said that ultimately thecorporate culture of ADM played a primary role in my decision making at the time. Alas, nottrue. These were decisions of my own making. When trying to win so hard that truth and ethicsdo not matter anymore, then one is in a bad place in his or her life. That is exactly where I wasin the early and mid-1990s. I cannot explain how I lost my way, but I did.